Investment Raises Questions About State Pension Fund

The investment, approved in a closed-door session, was extraordinary in several respects. The involvement of both an ex-board member and a lawmaker may be unprecedented. The board rarely overrides its staff and consultants. And the deal was marked by alleged conflicts of interest, including a consultant's sale of a yacht to the executive overseeing the investment.

Alfred R. Villalobos, a onetime trustee of the California Public Employees' Retirement System, stood to gain at least $750,000 by persuading the pension board to invest in a $2.5-billion fund operated by Hicks, Muse, Tate & Furst.

In addition to contacting 10 of the 13 board members, Villalobos enlisted the help of state Sen. Richard G. Polanco (D-Los Angeles), who advocated the investment to the two elected officials on the panel.

The controversial investment was narrowly approved in March, although the board's staff concluded that others had superior track records. The staff also warned that the private firm could profit as much as $40 million a year from fees even if the deal lost money for the pension plan.

The handling of the investment, critics say, raises questions about the pension board's ability to make important decisions based solely on what brings the highest return to the 1 million public employees who are its beneficiaries.

"This is people's . . . life savings they are counting on," said Robert Fellmeth, director of the Center for Public Interest Law in San Diego. "This decision should be really on its merits. It is no place for legislators to be intervening to make sure their friends and people they favor get the money."

Villalobos and Polanco, who have known each other for years, said there was nothing improper about promoting the investment and they believe that it will be a good one for California. Board members who were interviewed by The Times said they were not unduly influenced by them.

Employees, ranging from city workers and school janitors to judges and state highway workers, are covered by the pension system. Currently more than 300,000 people are collecting retirement benefits.